SCR722, a twice-cloned cell line developed from SENCAR epidermal cells initiated with N-methyl-N'-nitro-N-nitrosoguanidine (MNNG), unlike normal epidermal cells, is resistant to induction of terminal differentiation by Ca2+ or by the phorbol ester tumor promoter 12-0-tetradecanoylphorbol -13-acetate (TPA). Although resistance to induction of terminal differentiation by these inducers is associated with the neoplastic phenotype, SCR722 cells form apparently normal skin when grafted to nude mice. However, when tested in vivo, SCR722 cells, in contrast to normal primary epidermal cells, failed to suppress papilloma formation by SP-1 cells. SCR722 cells do not contain an activated oncogene detectible by transfection experiments with NIH 3T3 cells. These properties of SCR722 cells suggest that they could represent a form of neoplastic change which is not directly tumorigenic but is nevertheless related to the development of neoplasms. This concept is supported by studies which indicate that the introduction of the v-ras(Ha) gene or the T24 ras(Ha) gene into SCR722 cells can result in squamous cell carcinomas, whereas the same gene produces papillomas in normal keratinocytes. In contrast, introduction of the activated fos, myc, or EIA genes into SCR722 cells fails to alter the normal skin phenotype when the cells are grafted. These results suggest that the activated ras gene, but not the other oncogenes tested, can interact with the endogenous initiating lesion in SCR722 cells to produce malignancy. In vivo studies with DMBA initiation and TPA promotion indicate that inbred SENCAR mice have both a higher sensitivity and a more homogeneous tumor response than the commercially available outbred animals. In other in vivo studies, the protein kinase C inhibitor staurosporine applied twice weekly to grafts of SP-1 cells results in markedly reduced tumor size, probably by induction of terminal differentiation and consequent cell death in the SP-1 papilloma cells.